Posted On Apr 11, 2024

Being in the mortgage industry for many years now, I can tell you that every application is different.  Every single one!  But, I can tell you there are commonalities and best practices to get a mortgage application approved more quickly and seamlessly (avoiding frustration and emergency action for all involved). And whether you're a first-time homebuyer or looking to refinance, understanding the "5 C's of Credit" framework is crucial context for a smooth and efficient mortgage experience.

1. Character: The Backbone of Your Application

Lenders aren't just looking at numbers; they're assessing your reliability as a borrower. This involves a thorough examination of your credit history. Tip: Start by regularly monitoring your credit score. Dispute any errors and work on improving your score well in advance of your mortgage application. A clean credit report signals to lenders that you're a trustworthy borrower - and having dealt with discrepancies beforehand makes for one less thing to do and for your first impression to the lender to be your best impression.

2. Capacity: Your Financial Stamina

Here, lenders scrutinize your ability to repay the loan. They delve into your income sources, employment stability, and existing debt obligations. To paint a reassuring picture, ensure your income is verifiable and stable. If you're self-employed or have fluctuating income, be prepared with tax assessments and bank statements that showcase consistent earnings.  Keep a digital file of these documents that can be shared easily - and are properly labelled.

3. Capital: Your Skin in the Game

Lenders love to see substantial investment from your side, particularly in the form of a down payment. Consolidate your down payment funds into one account at least six months before applying. This not only simplifies the verification process but also demonstrates your commitment and financial discipline.

4. Collateral: The Safety Net

Your chosen property itself becomes a focal point. Lenders evaluate whether it's a sound investment that maintains or appreciates in value. Ensure the property is in good condition, appropriately valued, and fits well within its neighborhood.  For ex. A single-family detached home doesn’t “fit so well” in a neighbourhood of high-rise condo buildings. Or, a property that you love because of all the upgrades that no other home-owner in the neighbourhood has made (or intends to make) also doesn’t fit so well.  Avoid properties with potential red flags that could hinder resale value.

 

5. Conditions: The Fine Print

This encompasses the loan specifics and external factors such as market conditions and regulations. Familiarize yourself with current interest rates, loan terms, and market trends that could influence your application's outcome.

Some terminology that will impact your application…

  • Loan-to-Value (LTV): Most "A" lenders in Canada have strict LTV requirements.  Higher down payments not only reduce your borrowing costs but also increase lender confidence.

  • Debt Servicing Ratios: Your Total Debt Service (TDS) and Gross Debt Service (GDS) ratios are critical. Lenders use these to determine your ability to manage monthly payments alongside existing/other debts. Aim to minimize/eliminate unnecessary expenses and debts (before you apply for a mortgage) to improve these ratios.  For example, if you have only a few months of car payments left to make (but have the money to pay out your loan early) - then pay it out early as it will remove that particular debt payment from the debt-servicing calculation and improve the likelihood of being approved for your mortgage

  • Alternative solutions: Not all borrowers fit the mold for "A" lender programs. That's where a skilled Mortgage Agent becomes invaluable. We have access to a diverse range of lenders, including Alternative/B and private lenders, who may offer more flexible criteria based on the unique merits of your application.

Final Thoughts

Embarking on the mortgage application process can feel overwhelming, but preparation is key. By understanding and aligning with the 5 C's of credit, organizing your finances, and seeking the guidance of a knowledgeable Mortgage Agent, you can navigate this journey with confidence. Remember, there's a solution for every scenario, and I'm here to help you find the path to your new home.

 

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